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3 Steps To Calculate Retirement Savings You Need

The three key steps of retirement planning involve calculating expenses (current, future and emergency), accounting for inflation rates and knowing how early or late you plan to retire to estimate your life expectancy.

Retirement planning is a systematic way to determine how much money you need to maintain your current standard of living through your retirement years when you no longer receive a monthly paycheck.

It involves calculating your current and future expenses, accounting for any financial emergencies, current assets and liabilities, and determining when to retire – while considering inflation rates.

These factors combined together help give you a solid idea of how much your overall retirement corpus should be. We have offered a more detailed explanation of these points below in our blog, so read on to find out more.

How to Calculate How Much You Need To Retire

Step 1: Calculate Your Expenses

You can also use the retirement calculation formula given below, using your current expenses to estimate your retirement income needs:
 

Current Expenses = Current Income - Current Savings


For example, if your annual income is ₹15 lakhs and you save ₹3 lakhs every year, your current expenses amount to ₹12 lakhs.
 

  • You can start by listing your current expenses and omitting expenses that will no longer apply during retirement. This could be expenses like any loans/debt or children’s educational expenses you will have paid off by then.
  • Next, account for any early retirement activities like travelling, sightseeing and other bucket list expenses you plan to engage in.
  • Also, set up an emergency fund to account for any unexpected expenses during retirement, like medical emergencies.
  • Your withdrawal rate is a significant factor in determining if your retirement savings will last. Having an accurate estimate of your expenses after retirement is critical because it will affect how much you withdraw each year and how you invest in your savings.
     

If you understate your potential expenses, you may easily outlive your savings, or if you overstate your expenses, you may not be able to maintain your current lifestyle during retirement.
 

Step 2: Factor in Inflation

Inflation is the biggest hurdle you need to overcome when calculating retirement savings.
 

Your money today will not hold the same value in the future. Hence, future living expenses may be higher or different post-retirement.
 

For example, if you are 30 years old, have an average annual expense of ₹5 lakhs and plan to retire within the next 30 years (at 60 years). With an inflation rate of 6.67% p.a. (India’s inflation rate in 2022), you would need around ₹34.6 lakhs per year to maintain your current lifestyle.
 

To make this estimation easier, you can use an Inflation calculator to estimate your retirement income needs. This is a free online tool that can help you factor in inflation without going through lengthy manual calculations.
 

Step 3: Factor in Life Expectancy

Thanks to modern medicine, the average life expectancy of modern Indians has invariably increased, averaging at around 70 years. Per the UN’s projections, this average is expected to increase to 80 years by 2100.
 

Moreover, people living in urban India have easy access to technology, the internet and the latest healthcare services. To make sufficient financial provisions for an extended life, you need investment tools that will help your money grow faster than the inflation rate.
 

Most people invest in mutual funds or other market-linked instruments2 to grow their portfolios. Some also buy retirement plans from insurers like Tata AIA that offer a monthly pension once you retire.

Conclusion

Retirement planning is a lifelong process. This is because your needs, income, and circumstances will change as you age. Therefore, your financial plan must be flexible enough to account for these changes to ensure you estimate an accurate amount to save up for retirement.

One popular retirement planning option most people use to passively secure their retirement corpus is through retirement/pension plans from online insurers.

Peaceful Retirement Awaits: Discover Your Perfect Pension Plan

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions (FAQs)

What is a retirement income calculator?

These are free online tools most insurers provide on their website that estimate your retirement income needs. They give accurate estimates and remove the potential for human errors when doing manual calculations. 

What is the retirement calculation formula?

Most retirement planning calculators use this simple formula to estimate your retirement income needs:

FV = PV (1+r)^n

FV: Future Value.

PV: Present Value (Monthly Income)

r: Expected inflation rate (currently at around 6%)

n: Time to retire (retirement age - current age)

For example, you are 35 years old, and your current monthly expenses add up to ₹45,000. Say you want to retire at age 60.  

FV = 45,000 (1+0.06)^25 = ₹1,93,134.18

You will need ₹1,93,134.18 per month once you retire. You can convert this monthly amount to an annual income requirement by multiplying it by 12. So, ₹1,93,134.18 * 12 = ₹2,317,610.16.

What is the 30x rule for retirement planning?

It is a simple way to estimate your retirement savings. It is based on your current annual expenses and multiplying that by 30. For example, if your annual expenses are ₹3 lakhs, you will need ₹90 lakhs annually post-retirement.

The 30x rule can be beneficial if you want to use a simpler formula and are looking for a ballpark estimate when retirement planning.

Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not a guaranteed issuance plan, and it will be subject to Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions please read sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and do not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges, from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication, however, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • 2Market-linked returns are subject to market risks and terms & conditions of the product. The assumed rate of returns or illustrated amount may not be guaranteed and depends on market fluctuations.